A same-sex marriage law that took effect July 24 in New York doesn't mean those couples can count on the same tax treatment that heterosexual unions receive, a discrepancy that some lawmakers and companies are seeking to mitigate.
Under the 1996 Defense of Marriage Act, which prohibits the federal government from recognizing same-sex marriages, the Internal Revenue Service defines a marriage for federal tax purposes as “only a legal union between a man and a woman as husband and wife.” The agency has declined to comment further on the issue.
The definition means that same-sex married couples often face higher tax bills for health care, higher costs for tax preparation and, for wealthier couples, big estate-tax bills. The New York law will call attention to the different treatment, said Frederick Hertz, an Oakland, California, attorney and author of “Making It Legal,” a guide to same-sex marriage and other partnerships.
“The wealth and financial and legal complexity of the lives of so many gay New Yorkers are going to trigger tax problems and will force this issue,” Hertz told Bloomberg Government.
New York is the third most populous state and its new law doubles the number of people living in jurisdictions allowing same-sex marriage to more than 11 percent of the national population.
In recent years such companies as Cisco Systems Inc. and Google Inc. have begun reimbursing gay employees for the tax they incur on health-care coverage of their domestic partners. Those in same-sex marriages -- or other domestic partnerships short of matrimony -- face additional income-tax payments if they have employer-supplied health insurance and it is used by their partners.
The tax on that imputed income averages about $1,069 per employee filer annually, according to a study by the Center for American Progress, a Washington policy group often aligned with Democrats, and the Williams Institute, an affiliate of the University of California Los Angeles Law School that researches sexual orientation law.
Legislation sponsored by Senators Charles Schumer, a New York Democrat, and Susan Collins, a Maine Republican, would amend tax law to block the extra tax on the value of health and accident plan benefits provided to a domestic partner. The bill estimates that such employees are paying an extra $1,729 in taxes per year.
Health insurance for domestic partners is becoming a more common benefit, offered by 291 of the Fortune 500 companies, according to the Human Rights Campaign, a Washington-based gay advocacy group.
Nineteen businesses identified by the Human Rights Campaign reimburse gay employees for taxes on health care. Other companies that provide the benefit include the law firms of Skadden, Arps, Slate, Meagher & Flom LLP; Winston & Strawn LLP; and McDermott, Will & Emery.
Todd Solomon, a Chicago-based partner at McDermott, said the reimbursement is a matter of fairness.
“It's to reward our people equally with their opposite sex counterparts,” Solomon said.
Another complication for same-sex married couples is tax filing. Because the IRS doesn't recognize gay marriages, spouses in those marriages must file their federal returns as individuals. They also may have to fill out a “dummy” joint federal return in order to make calculations needed for a joint return in states or Washington, D.C., where same-sex marriage is sanctioned.
Hertz, the Oakland attorney and author, said the IRS could be more flexible on tax filing issues if it chose.
He pointed to the IRS guidance in May 2010 that same-sex married couples and registered domestic partners in three community-property states could divide their total income equally on their individual tax returns.
That has the effect of lowering taxes for some taxpayers in California, Washington and Nevada, particularly in unions where the partners had a large difference in income.
“The IRS is saying, ‘We recognize the property rights, but not your marital status.' I think it's a legal fiction, but I like it,” Hertz said.
The tax agency is in an awkward position because the Obama administration has said it believes DOMA is unconstitutional, has stopped defending it in court and supports legislation to repeal the law.
President Barack Obama has issued two memoranda ordering federal agencies to offer whatever benefits they can under existing law to same-sex partners of federal employees. The Department of Labor on July 26 released the first survey of employer-provided benefits available to domestic partners.
Neither presidential orders nor creative legal interpretations can offset the negative effects of the Defense of Marriage Act on the tax code, said Brian Moulton, chief legislative counsel for the Human Rights Campaign.
“There's a relatively small space before you bump up against DOMA,” Moulton said. “I don't think there's much they can do.”
The costliest consequence from the IRS's tax treatment of same-sex married couples involves the estate tax.
Under current law, a heterosexual spouse generally can inherit money or property from the other spouse without incurring estate taxes. If an estate exceeds the current $5 million exemption, the surviving spouse in a same-sex marriage can be liable for tax up to the top rate of 35 percent.
Last November, a New York woman sued to overturn DOMA and require the IRS to return $363,000 in taxes on an inheritance from her same-sex spouse. She also sought a court order barring the U.S. from treating her differently than spouses in heterosexual marriages.
Edith Windsor, who filed the suit, and Thea Spyer, who died in 2009, had been partners for 44 years. They married in Canada in 2007, a marriage recognized under New York law.
New York Attorney General Eric Schneiderman filed a friend of the court brief on July 26 in the Windsor case, arguing that it violates the right of same-sex couples to equal protection under U.S. law. At least six other suits challenging the constitutionality of DOMA are pending in federal court.